February 2015

For the month ending February 2015, spot gold closed at $1,213.22 down $70.55 per ounce, or 5.50 percent. Gold stocks, as measured by the NYSE Arca Gold Miners Index, fell 4.18 percent. The U.S. Trade-Weighted Dollar Index rose 0.52 percent for the month.

In 2014, governments added 477.2 metric tonnes to their reserves, the second-biggest increase in 50 years and 17 percent more than the previous year. Furthermore, central banks have added to gold reserves for the past five years, representing a reversal from two decades of selling. In addition, with the turmoil in Europe, their market for gold coins and bars is now twice as large as that of the United States, and similarly on par with those of China and India.

Looking at the massive net speculative dollar long positions on the InterContinental Exchange, the bull view on the dollar is arguably the most crowded trade there is across the world. Renowned investor Paul Singer from Elliott Management recently stated that his firm disagrees with the seemingly universally held belief that the U.S. is unquestionably the safe haven for the foreseeable future.

Mandalay Resources announced its proven and probable gold reserves were up 136 percent in 2014 as a result of the Bjorkdal mine acquisition. Richmont Mines announced revenues were up 47 percent and operating cash flow was up 689 percent in 2014. The merger and acquisition (M&A) space seems to be heating up in the gold mining industry. Tahoe Resources announced in February it will acquire Rio Alto Mining for $1.1 billion, and Timmins Gold announced it will acquire Newstrike Capital by way of a court-approved plan.

Weaknesses

Greece’s new left-wing government announced it will legally oppose a Canadian-run gold mine in northern Greece belonging to Eldorado Gold Corp. on the grounds of worker protections. Alamos Gold also received negative news that legal challenges in Turkey have increased uncertainty of the expected timing for receipt of permits for its Kirazli project.

According to a study of almost 100 global gold mining transactions by the Bloomberg Intelligence Metals and Mining team, valuations for gold mining deals peaked in 2011 and then fell more than 70 percent to a historical low in 2014. Mine prices fell faster than the metal itself due to a lack of corporate interest in deals. As a result, gold mine values fell 350 percent more than the metal’s price.

Barclays, HSBC and Deutsche Bank are among at least 10 international banks being investigated by the U.S. Department of Justice for alleged rigging of the precious metals market. The Gold Anti-Trust Action Committee is claiming that precious metals prices are being heavily manipulated by the big commercial banks in collusion with the U.S. Federal Reserve and other central banks.

Opportunities

Dundee Capital Markets initiated coverage of Klondex Mines with a “buy” rating. It highlighted that the company is positioned as a high-margin and growing producer, has no material capital requirements and is forecasted to generate sizable free cash flow. Furthermore, the company’s assets host highly prospective exploration upside.

RBC Capital Markets published a report highlighting Osisko Gold Royalties as being well-positioned to outperform in the current price environment. This is due to a strong balance sheet that could allow it to pursue accretive deals as well as positive optionality in its existing portfolio. This is yet another implication of the gold royalty business model which has outperformed the broader gold miner stocks in recent years.

Orex Minerals announced it has entered into a joint venture with Agnico-Eagle Mines for the development of Orex’s Barsele gold project in Sweden. The proposed joint venture would see Agnico-Eagle earn 55 percent of the project through the payment of $10 million and would also see the company commit to spending $7 million on the project over the next three years. What is interesting is that Orex Minerals has a $30-million market cap, so the $10 million put up by Agnico-Eagle represents about one-third of Orex’s market value. Orex also has three other projects, one which is already in a joint-venture agreement with Fresnillo. The management team at Orex has again proven that it is adept at structuring deals, as it had previously arranged for Orko Silver to be sold to First Majestic, only to be outbid by Coeur Mining.

Threats

The central banks of Switzerland, Sweden and Denmark are now imposing negative interest rates on bank deposits. Analysts at the Commonwealth Bank of Australia claim that almost a quarter of worldwide central bank reserves now carry a negative yield. The risk is that negative rates backfire and could result in even lower demand. Additionally, Citigroup said in a report last month that “there are no serious arguments against creating a financial system where nominal rates can be set with equal ease at negative 5 percent as at 5 percent.”

AngloGold Ashanti, Gold Fields, Sibanye Gold and Harmony Gold Mining have been trying unsuccessfully for at least a decade to link pay increases to efficiency gains. They will try again by lobbying for this in the wage negotiations with employees, set to begin in April. South Africa’s mining industry remains a highly complex space where aligning competing interests has proved difficult. Mining companies, labor and government seem to have very different opinions on how things should be done, leading to instability. Justin Froneman, director of equity research at Credit Suisse, said that international investors want active leadership at both the corporate and country level in order to reduce uncertainty

Although it is not likely to become law, hard rock miners would face significant challenges under Obama’s proposed budget as provisions seek to subject miners to a royalty of not less than 5 percent of gross proceeds, increases for annual claim maintenance fees and a new mineral leasing process.

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The NYSE Arca Gold Miners Index is a modified market capitalization weighted index comprised of publicly traded companies involved primarily in the mining for gold and silver. The index benchmark value was 500.0 at the close of trading on December 20, 2002. The U.S. Trade Weighted Dollar Index provides a general indication of the international value of the U.S. dollar. The Philadelphia Stock Exchange Gold and Silver Index (XAU) is a capitalization-weighted index that includes the leading companies involved in the mining of gold and silver. The S&P/TSX Global Gold Index is an international benchmark tracking the world's leading gold companies with the intent to provide an investable representative index of publicly-traded international gold companies. The FTSE/JSE African Gold Mining Index is a market capitalization weighted index. (Returns are quoted as price return in the home currencies of each index. For example, the S&P/TSX Canadian Global Gold Index is calculated using Canadian Dollars.) The FTSE/JSE African Gold Mining Index is a market capitalization weighted index.

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